The following question was submitted via SmartCredit.com’s blog.
Q: John, I’m thinking of doing a short sale on my rental house to get rid of it. If I do that can my credit card creditors increase my rates? I’ve read where it’s illegal to increase rates on credit cards after the Credit Card Act.
Answer: First things first, it is definitely not illegal for credit card issuers to increase your interest rates even with the CARD Act in place. Credit card issues just can’t increase rates on existing balances, the so called retroactive rate increase, unless you miss payments. And, they have some restrictions on whether or not they can raise rates on performing accounts for the first year. After that, it’s fair game. Point being, if they want to raise your rates they’ll likely be able to do so very easily. Now, on to your question…If you short sell your rental property it will likely show up as a settlement on your credit reports. That will not be a secret and your credit card issuers will likely know about it within 30 days. Most credit card issuers pull credit reports and scores monthly to see if your credit risk has changed.
If the settlement has lowered your FICO scores enough to concern them then yes, they can take adverse action against you. That can include lowering your credit limit, increasing your interest rate or closing the account altogether. If they take these actions based on information in your credit report then they have to send you a copy of that report AND the actual score they used from which to base their decision. This is called a notice of adverse action and it can be sent in the mail, via email or given to you verbally.
They won’t be able to raise the rates on existing balances UNLESS you start missing payments with them directly. If you score plummets you will likely see your cards either closed or their limits lowered to the point where you can’t effectively use the card any longer. But, keep in mind that the damage caused by the short sale will lessen over time and the trade off of getting OUT of a bad mortgage situation might be well worth the lack of credit cards for some time.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.